Toward the Great Cleansing

Chapter 1 (Part 1 of 4) of the book

The Discovery of First Principles, Volume 3

Edward J. Dodson

[This, third volume of The Discovery of First Principles, is made available on-line, without charge to readers. Full rights of publication are retained by the author. The book is divided into six chapters, four sections per chapter, linked below at the end of each section. Volumes 1 and 2 are available for purchase from the publisher, iUniverse and most on-line book retailers.]

I can recall experiencing, as a fresh college graduate [in 1925], the promptings of a vague Wilsonian liberalism; a regret that the Senate had rejected American membership in the League of Nations; a belief in laissez-faire economics and the values of competition; and a corresponding aversion to high tariffs. Beyond that, there was only a sensitive and impressionable tabula rasa. Some might make of this a reproach to [Princeton] university. I chalk it up to its credit. It is the task of the university to prepare men for the formation of their prejudices, not to impregnate them with its own.[1] [George F. Kennan]

On October 3, 1918, representatives of a worn out, if not quite defeated, German nation made contact with officials of the United States headquartered in Paris. Looking for the most favorable way out of the war, the Germans indicated they would accept President Wilson's Fourteen Points and lay down their arms. Edward M. House quickly carried the German proposal to the British, French and Italians, who argued amongst themselves over terms for nearly a month before finally agreeing to an armistice. Soon thereafter, the armies disengaged and began demobilization. As the dense smoke cleared and the carnage of war was calculated, the Allied leaders began to plan how they would carve up the territories of defeated Old World empires.

Germany's citizens were both disillusioned and confused. Victory in the East had been complete and new territories added to the Reich. Yet, they now learned that Ludendorff's armies had been defeated by the Allies in the West and that Germany's own borders had been threatened by invasion. A crisis in leadership opened the door for the socialists, who moved quickly into the political void to establish a government they hoped might receive favorable treatment in the coming negotiations. Wilhelm II abdicated and fled to the Netherlands, and Ludendorff was removed as supreme commander of the German army. Finally, on November 11, the German delegation met with the supreme Allied commander, Marshal Ferdinand Foch, to sign the armistice. Their resources exhausted and their army outnumbered, the Germans had little choice but to put their fate in the hands of Woodrow Wilson and hope for a just peace. Time would unfortunately show that Wilson simply did not possess the statesmanship and temperament to build a coalition for peace. Both the French and British leaders were committed to the survival of their own empires and the destruction of the German and Austrian states. Historians would eventually discover another reason for Wilson's failures: throughout his Presidency he had apparently suffered from a serious brain disorder that caused him to behave irrationally and impatiently in the face of any opposition.

To the French, who had suffered most at the hands of the Germans, the time had come to claim the spoils of victory. Georges Clemenceau told Wilson, candidly, that there could be no long-lived peace with the Germans. Regardless of the terms of peace, Clemenceau lamented, "[t]hey will seek only the chance of revenge." To which he added: "Nothing will suppress the fury of those who hoped to dominate the world and believed success so near."[2] Clemenceau and many others among the French leaders argued that the survival of France -- and peace on the European continent -- demanded that the Germans be denied the ability to amass resources and manpower under a centralized government, while making certain that France always maintained a clear military superiority. This was, by and large, also the desire of the majority of French citizens. Only the few socialists in the French Parliament openly challenged Clemenceau's aims. However, although the upheaval in Russia also stimulated socialist activism in France, Clemenceau was far more concerned with reactions of the ultra-nationalists and the military. Whenever Wilson pressed one or more of his Fourteen Points or some other issue, Clemenceau simply threatened Wilson with his resignation, assuring the U.S. President that his successor would come from the ranks of ultra-nationalists who would stand for nothing short of the political annihilation of the German state. Wilson could find no way to break through the hard line taken by both Clemenceau and Britain's Lloyd George.

Wilson put the prestige of his office on the line by personally taking charge of the U.S. negotiations. In doing so, he ignored the advice of most members of his cabinet and leaders of his party. He was convinced that his leadership was essential to the successful implementation of the peace accords and creation of the League of Nations. With the creation of a League of Nations, he believed his generation would not merely bring an end to war but usher in the beginning of a new world order. Predictably, the number of individuals in the U.S. wanting to play a role, however small, was almost endless. Many who would rise to positions of great responsibility in the policy-making hierarchy during the coming decades came with him to Europe or came on their own. Yet Wilson asked virtually none of them for advice. Of even the senior officials, notes Charles L. Mee, Jr., "Wilson ignored all of the members of his delegation except for ... [Edward] House."[3] Walter Lippmann, who materially assisted House during the critical period prior to the armistice, was eased out of the picture and eventually returned home to the United States. John Foster Dulles, Allen Dulles, Adolf Berle, and Samuel Eliot Morison were all part of the U.S. delegation. Mostly, they simply sat and waited along with everyone else for some news regarding the negotiations between Wilson, George and Clemenceau. Unsolicited, John Foster Dulles went to the trouble of preparing a memorandum to Wilson restating the best arguments against punishing the German people for the crimes of their leaders. Dulles also outlined a program for European recovery.

After his initial discussions with Clemenceau, Wilson crossed the Channel to meet with Lloyd George, who was then standing for re-election. The British people were demanding that Germany pay for the costs of the war, a public demand Lloyd George's Liberal party could not (politically) afford to ignore. Nearly 760,000 Army and Royal Navy personnel had perished, and Britain's national debt had climbed to over 7,000 million pounds. Much the same could be said for Clemenceau's position with the French. The costs in lives, the diversion of land, labor, capital goods and financial reserves into the production of war materials and the wholesale destruction of wealth had been enormous. The total number of deaths for all belligerents has been estimated at around 28.5 million. An entire generation of young men was decimated; and, in the process the fighting had "cost $180.5 billion directly and $151.6 billion indirectly."[4] For Germany and Austria-Hungary, as well as for France and Britain, the good will of Woodrow Wilson and the people of the United States was crucial to a rapid recovery -- at least that was the opinion of economist John Maynard Keynes:

Europe was in complete dependence on the food supplies of the United States; and financially she was even more absolutely at their mercy. Europe not only already owed the United States more than she could pay; but only a large measure of further assistance could save her from starvation and bankruptcy. Never had a philosopher held such weapons wherewith to bind the princes of this world.[5]

Keynes was one of only a small group eager to put their trust in the philosopher Wilson to bring about a peace they hoped would be permanent in nature. Keynes hoped an international coalition of liberals, progressives and moderate socialists could prevent a dictated peace that would leave Europe in a state of chaos, divided politically and in unresolved conflict over the control of economic resources. Under the circumstances, only Wilson's leadership offered a modicum of hope that moderation would prevail. What Keynes and others of similar mind feared was the frustration mounting within populations tired of waiting for politicians to punish those who had embraced the gods of war and had lost. What even Keynes missed, of course, was the real key to making the future safe for social democracy (and, lead, incidentally, toward a state of cooperative individualism); namely, the adoption of measures that would end the concentrated control over locations and natural resources and thereby achieve a much greater degree of equality of opportunity. For whatever reason, Keynes did not give proper weight to the fact that the Junkers remained as a powerful class in Germany, as did their counterparts in France and Britain. And, in neither country did these wealthy controllers of the land contribute to the war effort in proportion to the privileges they enjoyed. Britain, alone among the major powers, had relied more on taxation than on borrowing to raise revenue. Yet, Britain's leaders predictably chose to tax production and commerce rather than privilege. Despite this, Keynes was quick to chastise the French and Italians for their failure to pay for the war expenditures with taxation rather than debt. Germany, of course, had made the same mistake. "In Russia, Poland, Hungary, or Austria," added Keynes, "such a thing as a budget cannot be seriously considered to exist at all."[6] The question now before these governments was how to raise the revenue to provide for public services and how to once again stimulate wealth production.

Winston Churchill, surveying the new world disorder arising out of the ashes of warfare, reflected on the magnitude of the destruction to long-standing socio-political arrangements and institutions:

The conditions were outside all previous experience. At the outbreak with all its unknown and measureless possibilities the flood of crisis flowed along channels which for some distance had already been prepared. ...The immense forces of destruction, long gathered and stored, were released. ...

The men at the head of the victorious states were subjected to tests of the most trying kind. They seemed all-powerful: but their power was departing. ...With every day's delay it became more difficult to gather the fruits of victory. With every day the power not only of statesmen, but of the Allied nations themselves, and their unity, must decline, their armies must come home; their electorates must regain their sway. Jealousies, factions, revenges long pent up now advanced on every side. Yet every day was so full of important and urgent business, and so disturbed by jostling personalities and events, that human nature could not cope with the task.[7]

Churchill could speak first hand of Britain, where the war had derailed efforts by the radical Liberals to move at least part of the way toward ending land monopoly and the privileges attached to private land ownership. The dwindling remnant of radical Liberals who believed in the cause brought to Britain by Henry George and financed to a great extent by Joseph Fels were unable to fight off a Conservative effort to repeal the limited taxation of land values contained in the Finance Act of 1910. During the war, even Philip Snowden, the most powerful supporter of Henry George's proposals within the Liberal camp, abandoned the quest to end land monopoly and settled for a semblance of progressivity in taxation. After the war, the political climate facing Lloyd George upon his re-election in 1919 was altogether different. He journeyed to Versailles with a clear mandate to negotiate a peace settlement that would preserve and even expand the British empire, while putting Britain's financial house in order at Germany's expense, rather than looking to Britain's agrarian, urban and industrial landlords to compensate society for the privileges enjoyed.

From the very beginning of the negotiations, the French and British considered Wilson's Fourteen Points to be superfluous. Neither of these two Allies had ever agreed to the terms stipulated by Wilson. Wilson, for this part, did hold one important trump card -- the willingness of the United States to provide additional credit to Britain and France and to consider canceling some of the war debt. The U.S. President never played this card. He had no intention of resorting to economic blackmail or taking positions clearly against his moral sense of right and wrong.

As far as the French and British were concerned, the final version of the treaty would be delivered to the Germans, Austrians, Hungarians and Bulgarians as a fait accompli over which there would be no negotiation. The only questions to be resolved were how specific or how general they were going to be in the terms. They demanded a new balance of power that would permanently reduce Germany to a nation of regional rather than continental importance. Austria and Hungary were to be separated and their imperial territories taken from them. New sovereign nations were to be forged out of diverse peoples and given the names Czechoslovakia and Yugoslavia. Under the treaty, Rumania gained new territory at the expense of Hungary, and Italy was enlarged at the expense of Austria. Both Poland and Czechoslovakia gained territory occupied by German-speaking inhabitants whose loyalty to their new governments could never be counted on.

As a result of all these boundary changes and the disruptions in government and commerce, armed conflict spread throughout the former Austria-Hungarian empire. The Balkans, in particular, became charged with the explosiveness of ethnic nationalism that continues to plague the region to this day. Matters were made worse by the civil war raging in Russia, where Trotsky's Red Army battled the Allied Powers-supported anti-Bolshevik forces. A window of opportunity opened for nationalists in Finland, Estonia, Lithuania, Latvia and the Ukraine to declare their independence from Russia. War also erupted between the Poles and Hungarians, as well as the Czechs and Hungarians. Rumanians fought against Serbs, Croatians and Hungarians. The victorious allies could do virtually nothing to restore order. Germany, too, was also fast becoming an armed camp where chaos and terrorism reigned.

As early as mid-1916, the German socialists had split over the aims of the war. The Marxist-dominated faction formed the Independent Social Democratic Party and pushed for an end to the war. An inner faction of even more radical Marxists pressed for nothing short of overthrowing the government. By the time Ludendorff relinquished power to the Reichstag, any hope for a peaceful transition from de facto military dictatorship to parliamentary rule had become illusory. Some constitutional reforms were adopted by the Reichstag, and Wilhelm II quietly abdicated. Germany was briefly to be governed by the socialists under Friedrich Ebert and Philipp Scheidemann. The situation they faced was desperate and rapidly deteriorating as hunger, inflation and mass unemployment took hold. Rebellion erupted in Munich on November 7 and workers began demonstrating in Berlin two days later. Ebert became extremely fearful of what the radical Marxists, directed by Karl Liebknecht and Rosa Luxemburg, might do. When workers in Berlin filled the streets and established control over parts of the city, Ebert called on the Army to restore order. Thousands of workers were massacred during what amounted to a full-scale military assault. Liebnecht and Luxemburg were arrested, then murdered. With order restored and his most immediate competition eliminated, Ebert called for a national assembly to convene in Weimar. The remaining radical Marxists broke with other socialists to form the German Communist Party, while Ebert abandoned most of the socialist program in exchange for support from moderates and nationalists. A new constitution created a federal republic and Ebert was elected president.

One of Ebert's most serious internal challenges then came from Bavaria, where a new government headed by Kurt Eisner announced that Bavaria was breaking with the rest of Germany and seeking a separate peace with the Allies. Then, in late February of 1919, Eisner was assassinated by an aristocratic nationalist. Violence erupted and the communists seized power. Some thirty thousand paramilitary, members of the so-called Freikorps marched into Munich and put down the rebellion. What many Germans were beginning to sense was that the restoration of order would be only temporary:

The Freikorps left behind a city seething with anger and a lust for vengeance in every street and alley -- the hatred of socialists for the Freikorps, of Communists for monarchists, of royalists for Jews, of anarchists for industrialists, of nationalists for anarchists.[8]

From their first days in office, the leaders of the new Weimar Republic faced intense opposition. The Junkers and other conservative nationalists came together to form the National People's Party, whose primary reason for being was to gain power and destroy the Republic. For the time being they were willing to live marginally within the confines of established order, always looking for opportunities to "[take] advantage of parliamentary institutions to undermine them."[9] In Paris, the German representatives at the peace conference pleaded the desperate condition of the nation and warned of a Bolshevik takeover. Even more pressing, they advised the Allies, a severe food shortage threatened the population with widespread starvation. Everyone knew that only the United States was in a position to relieve the widespread misery of the European people. Wilson now drew the line and demanded the Allies provide relief. Clemenceau initially resisted helping the Germans, but in this instance Lloyd George supported Wilson, although the price to Germany was set quite high. Food was to be transported in German ships (turned over to Britain), and payment was to be made in gold. Ironically, Germany's only means of meeting reparations would now be with exports.

The final treaty was presented to the German representatives on May 7 at Versailles. Once translated into German, the treaty was sent to Berlin and announced to a disillusioned and angry public. Under the treaty, Germany was to be disarmed and left virtually emasculated by reparations. Many Germans demanded a refutation of the treaty and of Germany's responsibility for starting the war. Paul von Hindenburg, Germany's aged Field Marshal, advised Friedrich Ebert that the army could no longer resist an Allied assault in the West. The entire German navy, submarines included, had already surrendered to the British, and a blockade would bring about a total collapse of Germany. Convinced that the passage of a few years would lessen the Allied will for enforcement, and faced with no rational alternative, the Germans agreed to the terms and signed the treaty on June 28, 1919.

A Turn to Isolation and the Rise of Nationalism

Based on reports received from Europe months before the final treaty was ready, Walter Lippmann informed his New Republic readers that Wilson's Fourteen Points would be abandoned, that the treaty terms were excessively punitive and were certain to set the stage for a future conflict. When the final treaty was made public in the United States, the editors of the New Republic united in their opposition to its adoption. "Looked at from the purely American point of view, on a cold calculation of probabilities," they charged, "we do not see how this treaty is anything but the prelude to quarrels in a deeply divided and hideously embittered Europe."[10] The U.S. Secretary of State, Robert Lansing, admitted as much in his private and public statements. And so, many Republicans and at least some Democrats declared their opposition to the treaty, with Wisconsin's unconventional Senator, Robert M. LaFollette, taking the opportunity to engage the President in debate:

The little group of men who sat ... at Versailles were not peacemakers. They were war makers. They cut and slashed the map of the Old World. ...They locked the chains on the subject peoples of Ireland, Egypt, and India. ...Then, fearing the wrath of outraged peoples, ... they made a league of nations to stand guard over the swag![11]

Such reactions to the treaty terms angered rather than disheartened Wilson. He had compromised so much already, so he was in no mood to have to explain this to his own countrymen. He expected, even demanded, their support; yet he failed to provide the leadership around which a consensus could be forged. In the end, he had to face a U.S. Senate controlled by Republicans whose leader, Henry Cabot Lodge, opposed the League of Nations on the grounds that membership threatened U.S. sovereignty. Lodge and other nationalists drafted a long list of reservations to be appended to the treaty, in response to which Wilson became even more adamant that the treaty should stand as presented. Despite the counsel of leading Democrats that compromise was needed, Wilson's deteriorating physical condition and mental stresses now clearly affected his judgment. He could not be dissuaded from advocating a path along which political suicide was an absolute certainty.

Key advisers and others close to the President understood that Wilson's capacity to govern was now in serious question. His focus remained almost entirely on the treaty and the League of Nations, while the public was increasingly absorbed by problems affecting daily life - the rise in prices of goods and growing unemployment. As defense contracts expired and government spending fell, companies released some workers and reduced the wages of others. In retaliation, workers walked off their jobs all across the country. Despite the urgings of Assistant Secretary of Labor Louis F. Post, the national government simply left the corporations (i.e., the industrial landlords) to resolve their labor problems in whatever manner they saw fit. Business owners enlisted the assistance of the Immigration Bureau in a campaign to instill fear in workers who were not yet citizens. Aliens who were in any way affiliated with radical organizations were targeted for round-up, denied Constitutional protections and held for eventual deportation. Wilson seemed to be, and may very well have been, oblivious to these events.

In September of 1919 the President took his campaign in support of the League of Nations directly to the people, speaking to crowds in city after city all across the country. The strain of so many speeches and the travel by train exacted a heavy price on Wilson's health, and late in September he returned to the capital for treatment and recuperation. On October 2 he experienced a massive stroke. "What remained," concludes John M. Blum, "was not Woodrow Wilson but a shell and travesty of him."[12] Even more tragically for the people of the United States, he remained in the Presidency -- debilitated, isolated by a protective wife, and unable to see clearly what was happening around him. Whatever political constituency he had enjoyed now disappeared. The treaty could not be passed as written or even with Republican reservations added. Remarkably, Wilson briefly thought of running for a third term as a test for the treaty, a possibility not given serious consideration by a Democratic party anxious to return the nation's attentions to domestic affairs. The country had, indeed, tired of Wilsonian internationalism. The Republican reaction was to settle on a moderate Senator from Ohio, Warren G. Harding, as their candidate in 1920, and Harding easily defeated the Democratic nominee, Governor James M. Cox of Ohio. The problem of formalizing the peace now rested with a Republican administration firmly in control of the U.S. Senate. Harding's response to the nation's problems was, first, to call for a special session of the Congress where he announced his administration's intention to keep the U.S. out of the League of Nations and to simply repeal the nation's declaration of war against Germany and Austria-Hungary. In the months that followed, Harding sent representatives to participate in the post-Versailles reparations meetings and invited Britain and Japan to a conference on naval disarmament. On July 2, 1921 he signed the resolution formally ending the war with Germany.

In addition to the treaty, Harding faced a number of serious economic challenges associated with the war. Despite the fact that the United States had become the world's great exporting nation, the nation's Federal debt had climbed from $1 billion in 1914 to over $24 billion in 1920. Because both prices and incomes had also increased dramatically during the war years, Federal Reserve officials decided to orchestrate a contraction of the supply of credit in an effort to tame rising prices for goods and services. At this stage of economic management, monetary tools were the main ones looked to by most mainstream economists to mitigate the broad swings of the business cycle. By requiring banks to hold more cash in reserve and by increasing the rate of interest charged to banks for borrowing from the Federal Reserve, the anticipated result was a moderate cooling of the demand side pressure on prices. War had stimulated a full employment economy fueled to a great extent by government borrowing. Now, falling government purchases were not quickly replaced by business and consumer spending. Once again the agrarian and industrial landlords, faced with falling demand and disappearing profits, pressured Harding and the U.S. Congress to adopt policies that combined laissez-faire and protectionism -- socialism for the producer and unbridled individualism for the consumer. The Republicans and almost all the university-trained economists accepted these policies as the right and appropriate steps to take. The longer-term consequences of taking this path would be felt as the decade unfolded.

The dynamic circumstances that brought the nations of the Old and New Worlds together as either allies or adversaries in war did not resolve the deeply-rooted socio-political differences separating them. With the rapid development of communications systems and air travel, resolution of these differences could not long be avoided. Otherwise, future disagreements were sure to result in a renewal of armed conflict. Such concerns were widely voiced by thoughtful individuals in many countries. H.G. Wells, for example, wrote in 1922 that there were both systemic and cultural forces working against the ascendance of universal values. Although the United States was in the midst of a great experiment in pluralism, the majority (those of northern European heritage and holding to the Protestant faith) somehow thought that the society emerging would be homogeneous although uniquely American in its culture. A diverse and growing percentage of the population remained outside the mainstream, but even Wells simply ignored their existence:

[T]here was in the generation of people in the United States to whom this great occasion came, a generation born in security, reared in plenty and, so far as issues that had made Europe grave, a certain superficiality and lightness of mind. It was not that the American people were superficial by nature and necessity, but that they had never been deeply stirred by the idea of a human community larger than their own. It was an intellectual but not a moral conviction, with them. One had on the one hand these new people of the new world, with their new ideas, their finer and better ideas, of peace and world righteousness, and on the other the old, bitter, deeply entangled peoples of the Great Power system; and the former were crude and rather childish in their immense inexperience, and the latter were seasoned and bitter and intricate.[13]

Even with these limitations and enormous obstacles in the way, the hope of the transnationals for a different kind of world rested more than ever on the emergence of the United States as a permanent, progressive advocate of social democracy. The United States could no longer realistically retreat from center stage and hope to remain unaffected by Old World events. While on a lecture tour in the U.S. during 1921, Albert Einstein warned the people of the United States to resist the temptation of thinking they could ever again extricate themselves from the socio-political world beyond their borders. "The world, if it is to progress toward a brighter and nobler future, needs, as never before, the help of those great nations and men who are internationally minded,"[14] Einstein declared. "Without the active co-operation of the greatest country, the United States," he continued, "all efforts toward a sane organization of international relations are bound to remain ineffectual." [15] Only a small minority shared Einstein's views or heeded his warnings.

Harding's election was one indication that at least a majority in the U.S. had reached the limit of their tolerance for military adventurism in the Old World. When Republicans proposed holding an international conference on naval disarmament, Oswald Garrison Villard wrote in The Nation that Harding could "associate his name forever gloriously with greater service to all the world than has ever been achieved by any other modern ruler."[16] Albert Jay Nock was not so sure; he responded in The Freeman that Villard ought to know from history that the victorious nations would not be denied their spoils and their moment in the sun as unchallenged military powers. As for the United States itself, Republicans were no less committed to enforcing the Monroe Doctrine than Democrats. All agreed that a strong naval force was essential to the defense of U.S. territories -- and interests. Disarmament would, therefore, require the oversight of an independent and militarily strong League of Nations. Neither Britain, Japan nor the United States -- the world's three main naval powers -- responded with much enthusiasm to the possibility of relying on an international body to protect their sovereignty. Equally important to the course of events, the people of the United States, in particular, were looking inwardly, anxious to get on with their lives and the improvement of their own society. For these Americans the war had merely interrupted the steady march of reform. The time had come to complete the promise of the Progressive agenda.

Legislation and regulation had already managed to moderate some of the harshness out of American landlordism but failed to remove the fundamental causes. As a consequence, and absent a continuation of heavy government spending, the post-war economy could not absorb returned soldiers or those migrating from rural landlessness to urban poverty. Millions more were trapped in a cycle of poverty that kept them working long hours at subsistence wages in mines and sweatshops, often kept perpetually in debt to their employers. Technological changes and mass production methods were relegating an even larger portion of the working population to jobs that demanded fewer skills and commanded even lower wages. Thus, despite a rapid expansion in productive capacity, there were just not enough households in the country with high enough incomes to maintain an equilibrium between production and consumption. Once the pent up demand created by the war subsided, the nation's producers were faced with the problem of excess capacity. In the policy arena, neither the politicians nor the new generation of professional economists grasped the full nature or eventual consequences of the debt-financed expansion that kept the global economy functioning. Virtually all producers - agricultural and industrial -- now clamored for protection from competition.

Perhaps no contemporary observer with a pubic audience expressed greater cynicism concerning the quality of those who held public office or aspired to lead the nation than H. L. Mencken, who suggested to his readers that "[w]hatever the label on the parties, or the war cries issuing from the demagogues who lead them, the practical choice is between the plutocracy on the one side and a rabble of preposterous impossibilists on the other."[17] That a crisis in leadership existed was a broadly accepted fact. Nonetheless, implementation of fundamental reforms to the nation's socio-political arrangements and institutions were not being proposed within the mainstream political arena.

In the United States, the decade of the 1920s became a time of retrenchment and considerable self-delusion. Conventional wisdom held that would be well if only government protected domestic producers from imports. At the same time, domestic demand in Europe had not yet recovered, so European producers had to penetrate foreign markets in order to survive. As fragile as the global economy was, the United States was one of the few countries that could afford to import more than its producers exported without causing a serious drain on its gold reserves. With the war over, Harding advisers urged a program of economy in government, a balanced budget and retirement of the national debt - seemingly sound objectives for the United States that only added to the stresses of the larger global economy. Not unexpectedly, Harding made no moves to resurrect the Progressive era's attack privilege or remove barriers to trade. Henry George's lingering influence within the political arena essentially disappeared. Harding's Secretary of the Treasury, Andrew Mellon, represented the interests of the nation's wealthiest citizens. On their behalf he orchestrated an enormous tax cut with the promise that the wealthy would invest in job-creation. As Henry George would have predicted, the wealthy simply invested these funds in the stock and bond markets and in land. Another member of Harding's cabinet, Secretary of the Interior Albert B. Fall, implemented policies to turn over the public domain to private interests for unencumbered exploitation with almost no compensation to society for the privileges extended.

As if the above measures were not sufficient evidence of a blind obedience to the philosophy monopolistic privilege, Secretary of Commerce Herbert Hoover applied his organizational talents to the promotion of a protectionist-based export economy, one result of which was that late in 1922 the Senate passed the Fordney-McCumber Tariff Act. The tariff was neither the foundation nor even the catalyst for disintegration of the global economy. Yet, that such a highly protectionist policy was adopted at this crucial time reveals just how futile were the efforts of cooperative individualists in their struggle to adopt either economic or political reforms.

Harding's death in 1923 changed little. The nation's socio-political agenda was slowly and grudgingly beginning to accommodate the complex interests of those who fought to maintain the status quo. Most Progressives held firm to their beliefs and waited, putting faith in the democratic process to achieve incremental change. From the first, of course, the society emerging after achieving independence from British rule consistently subordinated principle to expediency and deal-making. Thankfully, these tendencies did not go unchallenged. Along the way, the system's safeguards against corruption were periodically strengthened (or weakened) in response to the public disclosure of crimes committed by public officials in league with monopolists and other scoundrels. Every new administration offered the promise of a new beginning; yet, the republic suffered from its numerous institutional weaknesses, serving privilege rather than the citizenry as a whole.

After Wilson, Harding had been, at least initially, a breath of fresh air for many people looking for a return to normalcy and a President who held similar values. For those who looked to the future and to the ascendancy of the United States on the global stage, the Republican administration interrupted what they viewed as inevitable and necessary. Upon the news that Harding had died, Walter Lippmann wrote to Felix Frankfurter: "Harding is dead and Coolidge is President of the United States. That's woe enough for the gloomiest."[18] The more thoughtful judgment, I suggest, is that Progressivism and Internationalism coexisted under Roosevelt and Wilson. Under Coolidge, the impetus for progressive reforms virtually disappeared. Illusory competitive markets rather than government regulation was relied upon to curb the excesses of the nation's rent-seeking landlords. The inevitable result was reflected on, in almost matter-of-fact fashion, by Arthur M. Schlesinger, Jr. in his history of the period:

By 1930 the two hundred largest nonbanking corporations, after growing during the decade at a rate two to three times as fast as the smaller nonbanking corporations, controlled about half the total corporate wealth of the country.[19]

Schlesinger's analysis of the problems caused by contradictory and inept government intervention, on the one hand, and laissez-faire protections of privilege on the other are insightful, if incomplete. He does not make the connection, for example, between the diversion of billions of surplus dollars gained from investment in the production of wealth into speculative investments in locations, natural resource-laden lands and the stock market. Nor does he venture into the area of inherited fortunes examined in great detail by writers such as Ferdinand Lundberg in his 1968 book The Rich and the Super Rich. Lundberg's research indicated that with only a handful of exceptions, "[n]early all the current large incomes … are derived in fact from old property accumulations, by inheritors - that is, by people who never did whatever one is required to do, approved or disapproved, creative or non-creative, in order to assemble a fortune."[20] Schlesinger could have gained significant insight by a reading of economist Harry Gunnison Brown's Economic Science and the Common Welfare, published in 1925. In this book, Brown forecasted dire consequences for the United States and all nations unless drastic corrective steps were taken without delay, a message delivered, it must be said, with more than a touch of cynicism. "Democracies do not always -- perhaps do not generally -- follow the path of wisdom even when this path is pointed out by its trained citizens," began Brown. "And those whose training should enable them to indicate the lines of wise policy are not always, themselves, sufficiently free from bias in matters involving conflicting class interests to make them safe guides."[21] Brown's unique insight was that the United States and the other major industrialized societies were, like it or not, bound together. He stressed the need for "some form of agreement, by treaty or otherwise, binding the central banking institutions of the five or six principal industrial and commercial countries to a more or less common policy"[22] that would prevent dramatic shifts in relative prices or the supplies of gold, currency and credit. He also proposed a shift from the gold standard to a commodities-based system "redeemable, continuously or at short intervals, in that amount of gold which would purchase a definite total of commodities-in-general."[23] Gold would, under these circumstances, become less of an object for hoarding and more readily available as a mechanism for stabilizing prices. An appreciation of what these controls would accomplish requires some expansion. In the following passage, Brown suggests how markets would function under this regime:

To illustrate, suppose a dollar to be, at the start, the equivalent of 25 grains of gold, and suppose that the United States Treasury would sell dollars for gold at that price, or gold for dollars. Suppose, further, that prices rise by (say) 1 per cent. If, then, the legal value of the dollar is changed to 25.25 grains, the rise of prices will tend to be, wholly or in part, corrected. The dollar is thereafter worth, when redeemed, 1 per cent more in gold than before. Holders of dollars would present them for redemption in gold until dollars were so scarce as to be worth as much as the 25.25 grains of gold in which they were being redeemed. If, nevertheless, prices continued to rise, the dollars could be made redeemable in larger and larger amounts of gold until finally the rise was stopped and prices were restored to their former level.[24]

Stabilization of prices also required that something be done to remove the protective walls being constructed to keep out foreign goods. "It should, indeed, be obvious to any reasonable person that other countries can not buy American goods if these goods may not be paid for in what the buying countries can produce,"[25] Brown warned. Protectionists tried to somehow argue that the citizens of a country benefited by sending to those of other countries goods of greater value than what they received in exchange. In the lexicon of the economist, this was supposed to represent a favorable balance of trade. In our own time, economists Milton and Rose Friedman expended considerable energy (with some degree of success) to show the fallacy of this thinking. "Exports are the price we pay to get imports," they write. "[T]he citizens of a nation benefit from getting as large a volume of imports as possible in return for its exports, or equivalently, from exporting as little as possible to pay for its imports."[26] Because tariffs have the exact opposite effect, they "can not possibly increase demand for labor, and, therefore, employment," Brown argued. "If it increases employment in some industries, it decreases employment in other industries." And, at the end of his book Harry Gunnison Brown addressed society's failure to collect the annual rental value of locations and natural resource-laden lands from those in possession. As had Henry George and so many others over the previous forty-five years, Harry Gunnison Brown championed the cause of the Single Tax:

To sum up, the change here discussed would remove heavy tax burdens some of which rest in large degree on wages; it would add to the net returns on capital; it would discourage speculative holding of land; it would make more easy the acquiring of land for production or for homes and so would facilitate the change from tenancy to ownership. Those who were ambitious to get farms and homes for themselves would have larger (because untaxed or less taxed) earned incomes to buy with, and they would not have to pay in advance, in a high price of land, the capitalized value of exploitation, ...

...Under our present system of taxation we tax the earned incomes -- interest and wages -- of farmers, manufacturers, laborers and all other persons. We diminish the profitableness of making improvements in soil and drainage, of erecting buildings, of planting orchards, of accumulating machinery and stock. But we tax land rents so lightly as to leave land values, i.e., capitalized prospective rents, high, and so make it seem easy and relatively worth while for discouraged users of land whose labor and interest incomes are highly taxed, to sell their land and live out their money. In brief, our policy of taxation gives almost the maximum encouragement to speculation in land, keeps the price of land high and so makes it hard to acquire except by the wealthy few, keeps earned incomes derived from the use of land relatively low and tempts users of land to sell. ...[28]

As Brown forecasted, a feeding frenzy of land speculation hit the United States -- in the same year that his book was published. Florida land was heavily promoted in the northern cities, attracting tens of thousands of migrants and triggering a wave of speculation that drove land prices up from a few dollars to thousands of dollars for a mere building lot. So much activity was generated that rights to nonexistent lots sold based only on a developer's blueprint. Purchase binders were sold, sold again and resold at enormous profits long before any infrastructure development was ever completed. Access to water, sewer, electricity, even roads, was typically projected for completion well into the future. Then, in the Fall of 1926 two massive hurricanes struck Florida, ending the boom and leaving destroyed communities, failed banks and bankrupt speculators behind.

All across the agricultural heartland of the United States a similar, though less dramatic, cycle of speculation in farmland had erupted during the boom years of the First World War. Then, with the return of peace and foreign production, falling commodity prices pulled land prices down as well. Farmers who had acquired additional acreage -- on credit and at inflated prices -- now faced default and the loss of some or all of their holdings. Numerous banks in the agricultural regions were hit with large loan defaults. Many failed. For the bankers as well as the farmers, prosperity was fleeting and illusory. No one at or near the center of power seemed to have any idea that the cycle of speculation was largely a function of socio-political arrangements in the form of seriously flawed tax policies. While economists continued to base their support for free trade on theoretical postulates, as a group they had little to say about the consequences of taxation levied against production and commerce versus the static activity of holding title to land. Even had they been more outspoken, however, the fact remained that powerful vested interests used their financial resources and persuasiveness to maintain protectionist walls and monopoly privileges. As one economist, Fabian Franklin, wrote in frustration, "a protective duty, once established, has rarely been got rid of altogether."[29] Other forms of privilege and subsidy have the same sort of entrenched existence once introduced.

Republicans when in power tended to legislate higher tariffs. Democrats tended to reduce the tariffs. The policy decisions were never about principle; rather, they were about who would be protected and to what degree. Harry Gunnison Brown and a small number of other economists offered warnings of what was to come but they were largely ignored. They knew that even free trade was not enough by itself to ward off the expansion-speculation-crash-recession cycle. Brown kept writing that although free trade was essential as a key ingredient to stability, even free trade would be globally effective only in conjunction with the collection of the annual rental value of locations and natural resource-laden lands. Maximum benefit would then require removal of taxation from wealth production and commerce.

One rather interesting insight into the rationale for laissez-faire protectionism appeared in the form of a biography of Herbert Hoover during the year of his campaign for the Presidency. As Secretary of Commerce, Hoover had turned his department into a central nervous system for U.S. companies producing for foreign markets. His approach to trade was purely pragmatic, and he was quick to recognize the strengths and weaknesses of U.S. producers. "Where we lead the world is in moderate-priced goods turned out in enormous quantities by machine methods," declared Hoover. "If we keep on delivering an honest product ... foreigners will realize finally that our goods, in spite of their unfamiliarity, are better and cheaper."[30] Prosperity, he believed, was directly linked to the expansion of exports, to intensive investment in capital goods, to competitive markets and to living wages paid to workers. And, if foreigners did not have the financial reserves to purchase U.S. made capital and consumer goods, such purchases ought to be financed by the U.S. This was, after all, good for all parties involved:

Before the war, Great Britain financed the world. Through circumstances not of our creation, we have succeeded to that office. Ahead of our exports has run a flood of American dollars. This creative capital, by raising the productiveness of foreign peoples, increases their purchasing power; there follow more sales for our business men, more employment for our workers. Except in a few instances where such loans were against the interest of the American people, Hoover has steadily encouraged this movement. ...

So much for export trade. But, as Hoover himself has said, American prosperity can in many ways be measured by the volume of imports. We export agricultural products and manufactured goods; we import raw materials. If the inflow of such commodities as rubber or sisal or platinum be clogged or restricted, American industry suffers. During Hoover's term with the department it has fought and won its notable battles to protect the consumer of imports. For in half a dozen products necessary to our industry or our national life, foreign Governments or commercial combinations have tried to establish monopolies of one form or another, and to make American consumers pay the price.[31]

Hoover, the engineer, viewed the world as an enormous machine, the parts of which malfunctioned because of the absence of universal standards and sound management. Although he took equality of opportunity and essential justice under the republic for granted, he recognized there were enormous inefficiencies in need of remedy. His approach to mitigating the business cycle, for example, was to establish a committee of key individuals from industry, labor, the Commerce Department and the economics profession to come up with an early intervention plan that would kill inflation at its earliest signs. Hoover was convinced that if inflation could be removed from the economic equation prices would operate, as theory suggested, to clear markets, maintaining the equilibrium between supply and demand. The committee's solution was largely that of a properly timed tightening of credit, enough to bring speculative investment activity under control but not enough to threaten the growth in production and consumption. This might sound like managing the economy but there was no thought of a Keynesian use of deficit spending by government to prime the pump during times of recession. By Hoover's measure, any need to even contemplate such an action was removed with the control of inflation at the expansion phase of the business cycle. By preventing speculative activity, there would be no crash and, therefore, no recession.

There was much that Hoover and his teams of experts did not understand about the system of wealth production and distribution. Collective ignorance, pushed and pulled by aggregate vested interest, prevented the adoption of sound public policies. To the extent any society came under the influence of the engineers and the professional economists, the managed economy evolved mismanaged. Politics assured the process followed a path of disjointed incrementalism. Conventional wisdom dictated the thinking of almost all political leaders and their advisors, few of whom thought of the market as potentially a win/win environment. National wealth was preserved and an improving standard of living was to be achieved not by guaranteeing equality of opportunity and a just distribution of wealth but by a positive balance of trade and the accumulation of gold bullion in the vaults of the central bank and treasury. Much of this thinking has remained. In 1967, for example, the British historian W.N. Medlicott wrote with absolute confidence in the conventional wisdom, that "[u]nemployment, the root cause of individual unrest and symbol of the unsolved problems, was due primarily to the failure to maintain the prewar level of exports."[32] No doubt, absent the domestic purchasing power of a high wage, full employment society, Britain (and all societies with similar structural flaws) required expanding overseas markets to absorb production. Ultimately, however, all accounts must be settled by the exchange of goods or some type of asset. Foreigners who hold a nation's currency but have no interest in the purchase of goods from that nation have a limited number of options. One that has always been pursued is investment in the land markets, where returns can be enormous if the investor senses correctly how long to stay in and when the time is nearing when producers can no longer absorb higher land costs and stay in business.

The Old World Competes for Hegemony … One More Time

Economists have tended to emphasize decisions affecting the supply of currency and credit as crucial to the decline in Britain's exports. Harold Van B. Cleveland presented a more balanced view, but one that also ignores the structural problems created by Britain's systems of land tenure and taxation:

[A]ll through the decade of the 1920s, the Bank of England hewed to a restrictive line. The Bank's domestic assets regularly declined, as the British monetary base, while the money supply also fell gradually until 1925 and thereafter increased very slowly. The policy probably accounts for the prolonged recession and for much of the unemployment, although the depressed condition of major export industries -- coal, textiles, steel, and shipbuilding -- due to increased foreign competition after the war, along with the unwillingness of labor to move out of the coal and textile areas, undoubtedly accounts for some of the unemployment.[33]

The war had certainly disrupted trade relations between all peoples around the globe. To his credit, Hoover was one of a few statesmen to understand that recovery could only occur on the basis of renewed production and not by transferring existing wealth from the defeated nations. Of the few economists who possessed international prestige, John Maynard Keynes was the most vocal in concurring with Hoover's assessment of the Eurasian crisis. Keynes did not, however, recognize the extent to which the societal objective of full employment without inflation,/i> depended on a purging of monopolistic privileges. He accepted without serious investigation the conventionally-held wisdom that stable economic growth could be sustained by the adoption of a rules-based approach to market intervention. As did Hoover, Keynes expressed his grave concern that economic recovery was the necessary agent for socio-political stability:

The essential facts of the situation, as I see them, are expressed simply. Europe consists of the densest aggregation of population in the history of the world. This population is accustomed to a relatively high standard of life, in which, even now, some sections of it anticipate improvement rather than deterioration. In relation to other continents Europe is not self-sufficient; in particular it cannot feed itself. Internally the population is not evenly distributed, but much of it is crowded into a relatively small number of dense industrial centres. This population secured for itself a livelihood before the War, without much margin of surplus, by means of a delicate and immensely complicated organisation, of which the foundations were supported by coal, iron, transport, and an unbroken supply of imported food and raw materials from other continents. By the destruction of this organisation and the interruption of the stream of supplies, a part of this population is deprived of its means of livelihood. Emigration is not open to the redundant surplus. For it would take years to transport them overseas, even, which is not the case, if countries could be found which were ready to receive them. The danger confronting us, therefore, is the rapid depression of the standard of life of the European populations to a point which will mean actual starvation for some ...

The significant features of the immediate situation can be grouped under three heads: first, the absolute falling-off, for the time being, in Europe's internal productivity; second, the breakdown of transport and exchange by means of which its products could be conveyed where they were most wanted; and third, the inability of Europe to purchase its usual supplies from overseas. ...

What then is our picture of Europe? A country population able to support life on the fruits of its own agricultural production but without the accustomed surplus for the towns, and also (as a result of the lack of imported materials and so of variety and amount in the saleable manufactures of the towns) without the usual incentives to market food in return for other wares; an industrial population unable to keep its strength for lack of food, unable to earn a livelihood for lack of materials, and so unable to make good by imports from abroad the failure of productivity at home. ...[34]

As Keynes understood the global economic system, government intervention had almost always been inept and counterproductive. That this observation was true is well-supported by history, but not primarily for the reasons he thought:

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. ...As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. ...

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent Governments, unable or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance. ...[35]

This power of government to self-create credit by either printing currency directly to exchanging government securities for central bank notes is an important part of the story. What Keynes means by securing loans is that rather than tax the wealthy (or, more specifically, the huge unearned incomes the wealthy receive as rent-seekers), government borrows from them and then pays them interest. Then, the government must find some source of revenue to make the interest payments. Imposing heavy taxes on imported goods, eliminating basic social services and investment in public goods, and increasing taxes on workers are then pursued while the economy continues to falter.

Keynes was hardly unique in being blind to (or, at least largely silent on) the operation of land markets and their role as the central engine of rising prices and crashing markets. At the direction of Lloyd George, Keynes and other economists had been called upon to participate in a Liberal Land Committee to examine what could be done to encourage the return of people to work in agriculture and to bring land back into production. And, in fact, Keynes became one of Lloyd George's most important advisers on matters of economic policy. Britain remained deep in recession during the 1920s, and Keynes played a central role in two studies - Britain's Industrial Future (1928) and We Can Conquer Unemployment (1929). Despite the commitment by Lloyd George to doing something about the land question in Britain, Keynes declared: "…I believe that this question, in its traditional form, has now become, by reason of a silent change in the facts, of very slight political importance."[36] Exactly what constituted this "silent change in the facts" Keynes did not say. Later, he would write of the diminishing importance of agricultural production to the economies of developed nations able to purchase agricultural products in a very competitive global market. In the emerging industrialized global economy, Keynes seemed to believe, the ownership and control of land would no longer have the same causes for concern as in the past. Keynes was putting his hopes in social democracy and the continued improvements in industrial productivity that would reshape the future:

If I am right in supposing it to be comparatively easy to make capital-goods so abundant that the marginal efficiency of capital is zero, this may be the most sensible way of gradually getting rid of many of the objectionable features of capitalism. …A man would still be free to accumulate his earned income with a view to spending it at a later date. But his accumulation would not grow. …

Though the rentier would disappear, there would still be room, nevertheless, for enterprise and skill in the estimation of prospective yields about which opinions could differ.[37]

Unfortunately, Keynes and most others concerned with economic policy failed to consider that at some point the race between population growth and increased production of wealth would be severely tested by rapidly escalating land costs. Other dynamics captured their attention during the 1920s, even as land markets were spinning out of control. The one policy that might have lifted them out of recession and prevented the deeper and broader global depression of the 1930s was given no consideration at all.

Faced with the consequences of their own failed policies and an unwillingness to make the right decisions, governments resort to the police power of the State to impose artificial equilibriums on those who actually labor or invest savings in wealth production. Governments first failed to collect the rental value of locations and natural resource-laden lands, increase taxes on wealth production and commerce to the point of discouragement and then borrow to pay expenses -- far too frequently for programs that benefit those who are already receiving the greatest subsidies and privileges. Finally, when more taxes and additional borrowing would not suffice to remain current on obligations and debt service, governments began to issue greater quantities of paper currency. Individuals are required to accept this paper currency at face value in repayment of government debt. Although this initially benefits government, additional sales of government debt instruments must post much higher rates of interest in order to attract purchasers. Secondarily, the purchasing power of the government's paper currency falls. How far and how fast depends upon the amount of paper currency added to that in circulation and on the demand for a nation's currency on the part of foreign banks. When the actions of government too deeply infect markets and destroy confidence, exchanges of goods for paper currency are discouraged; trade becomes more localized and increasingly based on barter or conducted in a foreign currency. One does not have to wait very long for civil unrest to follow.

These conditions were prevalent and spreading quickly after the First World War ended. "All these influences combine not merely to prevent Europe from supplying immediately a sufficient stream of exports to pay for the goods she needs to import," Keynes concluded without a full understanding of the underlying forces at work, adding: "but they impair her credit for securing the working capital required to re-start the circle of exchange and also, by swinging the forces of economic law yet further from equilibrium rather than towards it, they favour a continuance of the present conditions instead of a recovery from them."[38] Unless the leaders of the postwar era made a real effort to work together, Keynes warned, the immediate consequences would take the form of "[a]n inefficient, unemployed, disorganised Europe ..., torn by internal strife and international hate, fighting, starving, pillaging, and lying."[39] Leaving Britain's political leaders with this prediction of things to come, Keynes spent much of the next decade on a crusade to overturn the worst elements of Versailles and the temporary world order that emerged. First, he argued, the Allies must agree to cancel all war debts. Second, European nations (and any others who wished to join) must adopt policies of free trade. That was the extent of the Keynesian prescription for a stable future, at least for the moment. In Britain, political turmoil prevailed, and the Conservative Party emerged victorious in the 1924 elections. Any hope of addressing the land question in Britain - to serve as an example for the rest of the world - disappeared. The publication of a report in 1925 financed by Lloyd George, Land and the Nation, generated debate over what policies were needed to stimulate agricultural production and rural employment, but no legislation emerged with the aim of capturing as public revenue the economic rent of land. Not even a return of the Labour Party to power in 1929 changed things. In any event, time had run out for effective incremental changes in policy. A collective implosion never before experienced was now in the making.

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